December 19, 2008
The Auto Bailout: Doing by Regulation What Congress Failed to Legislate
Posted by David Zaring

As Gordon noted, the auto bailout is on, and it is the TARP that is the source of the funds and authority.  A few quick reactions, though Gordon's big picture seems exactly right.

The big test is "viability," which to be a positive net present value by March.  I don't see how viability on those terms (things will really not be different in March) is an invitation to anything but creative accounting.  Ford isn't participating, and the money is big, $17ish billion.  Close readers will note that the UAW got what it wanted on a new employment contract, in that the new contract must go in place at the end of 2009 (and not before, as Corker, et al, wanted), though the terms of what will surely be a takedown of franchisees and workers are supposed to be in place by the end of March.

The most notable thing about the auto bailout by Treasury is that it is slightly tougher, but roughly tracks, the failed auto bailout legislation.  Of course, since that legislation did not pass, the story is one of both a) countermajoritarian procedural hurdles in the senate being overcome, and probably not for the last time in the next four years, and b) regulation being used where legislation was considered and rejected.  Talk about two kinds of countermajoritarian!  Alexander Bickel, which branches are the dangerous ones now?

UPDATE: Per the comment below and in this post, Randy Picker doesn't buy the democracy worry - "Failed legislation doesn't alter passed legislation and it is that passed legislation that establishes what Treasury can and cannot do under the TARP."  My reaction: fair enough, and because the TARP is broadly drafted, it probably reaches car companies - though Congress wasn't thinking of them when it passed the bill.  It did think of them later and failed to pass legislation.  And though Randy is mostly right about the legislation in time thing, there's cases - reasonably decided cases, in my view - where the Court looked to ex post legislation to decide where the prior, very broad legislation had limits.  FDA v. Brown & Williamson, which shut down FDA's efforts to regulate tobacco based on the '06 FDCA is an example, though a bit more clear than this case......

The term sheet (via):

Financing Assistance to Facilitate the Restructuring of Automobile Manufacturers to Attain Financial Viability

Purpose: The terms and conditions of the financing provided by the Treasury Department will facilitate restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive financing. Amount: Auto manufacturers will be provided with $13.4 B in short-term financing from the TARP, with an additional $4 B available in February, contingent upon drawing down the second tranche of TARP funds.

Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

Definition of Viability: A firm will only be deemed viable if it has a positive net present value, taking into account all current and future costs, and can fully repay the government loan. Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:    
* Firms must provide warrants for non-voting stock.    
* Firms must accept limits on executive compensation and eliminate perks such as corporate jets.    
* Debt owed to the government would be senior to other debts, to the extent permitted by law.
    * Firms must allow the government to examine their books and records.    
* Firms must report and the government has the power to block any large transactions (> $100 M).    
* Firms must comply with applicable Federal fuel efficiency and emissions requirements.    
* Firms must not issue new dividends while they owe government debt.

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:
    * Reduce debts by 2/3 via a debt for equity exchange.    
* Make one-half of VEBA payments in the form of stock.    
* Eliminate the jobs bank.    
* Work rules that are competitive with transplant auto manufacturers by 12/31/09.    
* Wages that are competitive with those of transplant auto manufacturers by 12/31/09.

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations. In addition, the firm will be required to conclude new agreements with its other major stakeholders, including dealers and suppliers, by March 31, 2009.

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